The document discusses procurement processes for acquiring goods and services from outside sources. It covers: 1) Why organizations outsource including reducing costs, focusing on core business, and accessing new skills. 2) The key procurement management processes of planning, solicitation, source selection, contract administration, and closeout. 3) Factors to consider in procurement planning like what, when, and how much to procure as well as contract types involving fixed price, cost reimbursement, and unit prices.

1. Procurement
OPS430
Professor Ken Hogan

2. Introduction
Procurement means acquiring goods and/or services from an
outside source. Procurement is the term generally used by
government, while business uses the term purchasing and
outsourcing is commonly used by the information technology
industry.
It is estimated that in the year 2003 the worldwide information
technology outsourcing market has grown to over US$110
billion.

3. Why Outsource?
Outsourcing is a growing practice within the IT
industry, and it is important to appreciate the
reasons it is adopted:
• To reduce both fixed and recurrent costs.
• To allow the client organization to focus on its core business.
• To access skills and technologies.
• To provide flexibility.
• To increase accountability.

4. Procurement Management Processes
Project procurement management includes the following
processes for acquiring goods and services from outside the
project organization:
• Procurement planning: determining what to procure and
when.
• Solicitation planning: documenting product requirements
and identifying potential sources.
• Solicitation: obtaining quotations, bids, offers, or proposals
as appropriate.
• Source selection: choosing from among potential vendors.
• Contract administration: managing the relationship with
the vendor.
• Contract close-out: completion and settlement of the
contract.

5. Procurement Management Processes
& Key Outputs
• The figure below summarises the major processes involved in
procurement management, and identifies important milestones
associated with each stage.
• For example, after procurement planning the key milestone is the
“make or buy decision”. This will determine if further
procurement management processes are required.

6. Procurement Planning
Procurement planning involves identifying which project needs
can be best met by using products or services outside the
organization. It includes deciding:
• Whether to procure.
• How to procure.
• What to procure.
• How much to procure.
• When to procure.
It is essential to be thorough and creative when planning
procurement. Even though a company may be viewed as a
competitor, it will often be advantageous to collaborate on
some projects.

7. Inputs to Procurement
Planning
The inputs needed for procurement planning
include:
• The project scope statement.
• Product description.
• Market conditions.
• Constraints and assumptions.
It is important to define the scope of the project, the
products, market conditions, and constraints and
assumptions. However, it is also essential to know
exactly why you want to procure goods or services.

8. Tools and Techniques
Procurement management will often incorporate the following:
• Make-or-buy analysis: determining whether a particular product or
service should be made or performed inside the organization or
purchased from someone else. Often involves financial analysis.
• Experts, both internal and external, are valuable assets in
procurement decisions.
• Internal experts are particularly useful in providing knowledge of
organizational and personnel issues.
• External experts can provide expert judgment, especially with regard
to vendors and technology issues.

9. Types of Contracts
A contract is a mutually and legally binding agreement
that obligates the seller to provide specified
products or services, and obligates the buyer to pay
for them. Different types of contracts are suited to
particular circumstances, there are three broad
categories:
• Fixed price or lump sum: involve a fixed total price
for a well-defined product or service.
• Cost reimbursable: involve payment to the seller
for direct and indirect costs.
• Unit price contracts: require the buyer to pay the
seller a predetermined amount per unit of service.

10. Fixed Price Contracts
Fixed price or lump sum contracts involve a fixed total price for
a well-defined product or service. These contracts are
particularly suited where supplies or services can be clearly
specified before tenders are invited. The buyer incurs little risk
in this situation.
Fixed price contracts may also include incentives for meeting or
exceeding project objectives. They may also include
safeguards in the form of penalty clauses, however these may
be difficult to apply before the consequences of delay are felt.
An important consideration is that any changes to resource
requirements due to project revision (change) is likely to lead
to additional claims by, and extra payment to the contractor.

11. Cost Reimbursable Contracts
Cost reimbursable or cost-plus contracts involve payment to the
seller for direct and indirect actual costs. These contracts are
often used for projects that include the provision of goods and
services associated with new technologies. The buyer absorbs
more risk with the type of contract, which has three forms:
• Cost plus incentive fee (CPIF): the buyer pays the seller for
allowable performance costs plus a predetermined fee and
an incentive bonus.
• Cost plus fixed fee (CPFF): the buyer pays the seller for
allowable performance costs plus a fixed fee payment
usually based on a percentage of estimated costs.
• Cost plus percentage of costs (CPPC): the buyer pays the
seller for allowable performance costs plus a
predetermined percentage based on total costs.

12. Unit Price Contracts
Unit price contracts require the buyer to pay the seller a
predetermined amount per unit of service, and the total value
of the contract is a function of the quantities needed to
complete the work.
Unit price contracts are also called a time and materials
contract, and may incorporate volume discounts.
This type of contract is often used for services that are needed
when the work cannot be clearly specified and total costs
cannot be estimated in a contract. Many contract
programmers and consultants prefer to use unit price
contracts.

13. Contract Types Versus Risk
• The figure below summarises the spectrum of risk to the buyer and
seller for different types of contract. Note that a low risk option for
a buyer will be high risk for the seller, and visa-versa.

14. Many contracts include a statement of work (SOW). A
statement of work is a description of the work required for the
procurement. The SOW describes the work in sufficient detail
to allow prospective sellers to determine if they are capable of
providing the goods and services required, and to allow them
to determine an appropriate price.
A good SOW gives bidders a better understanding of the buyer’s
expectations, and therefore should be as clear, concise and as
complete as possible. It should describe all the services
required, and include performance reporting requirements.
The SOW should specify the product of the project, use
industry terms, and refer to industry standards.

15. Statement of Work (SOW)
Template
I. Scope of Work: Describe the work to be done to detail. Specify the hardware and
software involved and the exact nature of the work.
II. Location of Work: Describe where the work must be performed. Specify the
location of hardware and software and where the people must perform the work
III. Period of Performance: Specify when the work is expected to start and end,
working hours, number of hours that can be billed per week, where the work must
be performed, and related schedule information.
IV. Deliverables Schedule: List specific deliverables, describe them in detail, and
specify when they are due.
V. Applicable Standards: Specify any company or industry-specific standards that
are relevant to performing the work.
VI. Acceptance Criteria: Describe how the buyer organization will determine if the
work is acceptable.
VII. Special Requirements: Specify any special requirements such as hardware or
software certifications, minimum degree or experience level of personnel, travel
requirements, and so on.

16. Solicitation Planning
Solicitation planning involves preparing of the documents
needed for requesting bids (solicitation), and determining the
evaluation criteria for the award of a contract. Common
documents used in this process are:
• Request for Proposals: used to solicit proposals from prospective
sellers where there are several ways to meet the sellers’ needs.
• Requests for Quotes: used to solicit quotes for well-defined
procurements.
• Invitations for bid or negotiation and initial contractor responses
are also part of solicitation planning.

17. Outline for a Request for Proposal
(RFP)
I. Purpose of RFP
II. Organization’s Background
III. Basic Requirements
IV. Hardware and Software Environment
V. Description of RFP Process
VI. Statement of Work and Schedule Information
VII. Possible Appendices
A. Current System Overview
B. System Requirements
C. Volume and Size Data
D. Required Contents of Vendor’s Response to RFP
E. Sample Contract

18. Solicitation
Solicitation (or tendering) involves obtaining proposals, tenders
or bids from prospective sellers. Prospective sellers do most
the work in this process, usually at no cost to the buyer or the
project. The buying organisation is responsible for advertising
the “request to tender” (the solicitation).
Organizations can advertise to procure goods and services in
several ways:
• Approaching the preferred vendor.
• Approaching several potential vendors.
• Advertising to anyone interested.
A bidders’ conference or similar meeting between the buyer and
the prospective sellers can help clarify the buyer’s
expectations.

19. Source Selection
Once buyers receive proposals, they must select a
vendor or decide to cancel the procurement.
Source selection involves:
• Evaluating bidders’ proposals.
• Choosing the best one.
• Negotiating the contract.
• Awarding the contract.
It is highly recommended that buyers use formal
evaluation procedures for selecting vendors.
Buyers often create a “short list”.

20. Sample Proposal Evaluation
Sheet
The following template could be used by a project team to help create
a short list of the best three proposals.

21. Source Selection
After developing a short list of possible sellers, organizations will
often undertake more detailed evaluation.
The following figure lists items that might be part of an
evaluation of the top three vendors for a large information
technology project.
All of the evaluation criteria are given a certain number of
possible points (based on ranked importance), and the project
team members and other stakeholders then evaluate each
proposal by assigning points to each criteria.

22. Detailed Criteria for Selecting Vendors

23. Contract Administration
Contract administration ensures that the seller’s performance
meets contractual requirements. Contracts are legal
relationships, and are subject to the contract law in the country
where the project is conducted, and in the case of international
projects, the country of supply.

24. Contract Administration
However, due to their complexity, many project managers ignore
contractual issues. This can result in serious problems. Ideally,
the project manager and the project team should be actively
involved with contract law experts in the preparation and
administration of contracts.

25. Contract Administration
Project members must be aware of the legal problems they might
cause by not understanding a contract. In particular, most
projects involve changes, and these changes must be handled
properly for items under contract.

26. Change Control for Contracts
Change control is an important part of the contract administration
process. The following change control process must be applied where
there are contracts:
• Changes to any part of the project need to be reviewed, approved, and
documented by the same people in the same way that the original part of
the plan was approved.
• Evaluation of any change should include an impact analysis. How will the
change affect the scope, time, cost, and quality of the goods or services
being provided?
• Changes must be documented in writing. Project team members should also
document all important meetings and telephone phone calls.

27. Contract Close-out
Contract close-out is the final project procurement
management process. It includes:
• Product verification to determine if all work was
completed correctly and satisfactorily.
• Administrative activities to update records to
reflect final results.
• Archiving information for future use.
Procurement audits are often undertaken during
contract close-out to identify lessons learned in the
procurement process.

28. Conclusion - 1
It is essential that organizations obtain good contracts that
minimize risk while ensuring optimum results through
effective contract administration.
With the current competitive and demanding conditions found
in information technology projects, it is very important to
prepare contracts with great care and expert assistance. It is
equally important to initiate and follow effective contract
administration procedures.

29. Conclusion - 2
The following guidelines can help can assist in
preparing proposals, contracts and administrative
procedures:
• Use checklists and templates where appropriate.
• Evaluate risks by reference to suggested contract
provisions where appropriate.
• All major proposals and contracts, and contracts
with questionable provisions, should be reviewed
by a contract law expert.
• Appropriate pricing and/or insuring of risk under
the contract.
• Periodic review, improvement and updating of
contract preparation and administration
procedures.